Is the RBA's restrictive policy working?

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What the housing market is telling us

Last week, the RBA reiterated the need for monetary policy to remain restrictive to slow demand growth and return inflation to target. Two senior RBA officials have since pointed to the housing market as one of the clearest indicators of whether restrictive monetary policy is working. Recent developments in house prices, auction markets and mortgage lending suggest the adjustment is now well underway.

The correction is well underway

Capital city house prices have fallen by 2.8% from their peak, according to Cotality, with larger declines in Sydney and Melbourne. The downturn began after the RBA signalled its intention to raise rates and gathered pace after three rate hikes were delivered over the first half of 2026. Auction clearance rates fell below their long-run averages and the weakness has now broadened beyond the largest capitals. Daily data from Cotality for August suggest the downturn in established house prices may be accelerating across the eastern capitals, while previously resilient regional markets are also starting to lose momentum.

Why housing matters to the RBA

While the RBA does not target house prices, it does care about what they mean for the broader economy. Residential property accounts for two-thirds of total household wealth and, for most Australians, the family home is their largest asset. Changes in housing wealth therefore tend to have a larger effect on household spending than changes in share market wealth. Because housing responds quickly to changes in interest rates, it also provides an early indication of whether tighter financial conditions are slowing demand.

Not just an interest-rate story

While the RBA does not target house prices, it does care about what they mean for the broader economy. Residential property accounts for two-thirds of total household wealth and, for most Australians, the family home is their largest asset. Changes in housing wealth therefore tend to have a larger effect on household spending than changes in share market wealth. Because housing responds quickly to changes in interest rates, it also provides an early indication of whether tighter financial conditions are slowing demand.

 

The tax changes are reducing demand for established houses and reducing the amount of work monetary policy needs to do.

 

Where to from here?

The more important question is what happens next. House prices have already fallen by around 3% and we expect the correction still has further to run, with dwelling prices likely to fall around 5-10% peak-to-trough. 

Whether that becomes a broader economic problem will depend heavily on the labour market. A resilient labour market would allow households to absorb lower housing wealth through rising incomes. A weaker labour market would drag down incomes and spending but would also bring forward the prospect of lower interest rates. In either case, the labour market plays a critical role in determining how the housing adjustment feeds through to consumer spending and inflation.

This week's data suggest the labour market adjustment is occurring gradually rather than abruptly. Employment growth has slowed but remains positive, while wage growth has stabilised around 3¼%. But neither has collapsed: the labour market is losing some momentum, yet it remains resilient enough to support growth in household incomes. That should help cushion the broader economy, even as restrictive monetary policy weighs on demand, while also helping to restore housing affordability.

 

The labour market is losing some momentum, yet it remains resilient enough to support growth in household incomes.

 

Putting the downturn into perspective

While it is easy to feel pessimistic when the value of your home is falling, the downturn also deserves some historical perspective. The 5-10% peak-to-trough decline that we expect comes after an increase of almost 50% since the pandemic. A downturn of this magnitude would not be unusual. In the housing markets downturns since 1993, the average peak-to-trough decline was 5% and they typically lasted around one year. 

A market still short of housing

More fundamentally, however, the current downturn is occurring within a market that remains structurally undersupplied. Higher interest rates and changes to investor tax settings are reducing demand, but they do little to address the underlying shortfall of housing. Population growth continues to support demand, while elevated construction costs and weak productivity continue to constrain supply. Put simply, Australia still does not have enough housing. This should limit the extent of future price declines.

Housing is telling the RBA its policy stance is restrictive

For now, the message is clear. The RBA wants to slow demand growth and the housing market is providing evidence this is occurring. Higher interest rates are slowing demand, while the Government's tax changes are amplifying the adjustment and reducing the amount of work interest rates need to do. As painful as it may be for existing homeowners, the housing downturn is providing the RBA with assurance that monetary policy is restrictive, reducing the likelihood that another rate rise will be required.